JPMorgan Slips On Whale Fine; 25% Upside From Here?

By Teresa Rivas

JPMorgan (JPM) is down more than 1% not long before the close, as the company announced this morning that it would pay a $920 million fine, admitting guilt in the London “Whale” trading scandal.

Barrons.com weighed in on the news, saying that the selloff is overdone and JPMorgan shares look attractive at current levels.

Sterne, Agee & Leach analysts Todd Hagerman and Robert Greene seem to agree: The pair reiterated their Buy rating and $65 price target on the stock, which represents about 25% upside. They write that while the $920 million figure was higher than many were expecting, it’s not as if a “meaningful settlement” is a surprise. They note that they see legal and regulatory accruals diminishing next year, through 2015.

Read more details of their analysis below:

“London Whale” civil money penalties announced this morning. JPM announced approximately a ~$920mm (~$0.16/shr atx) multi-agency settlement regarding the company’s ’12 Chief Investment Office (CIO) losses, related trading activities, and more specifically unsafe and unsound operating practices. The total amount of the settlement was higher than expected, although material civil money penalties were expected none-the-less. In addition, JPM disclosed that it had received a Wells Notice from the CFTC, recommending enforcement actions against the bank related to its CIO trading activities, exclusive of other government investigations that remain open. The bank regulatory agencies essentially shared a proportional cut of the action, regardless of their role in supervisory authority of the company and its affiliates. The $920mm civil money penalty constitutes four separate settlements with various regulatory entities in both the US and the UK. JPM was levied $300mm by the OCC, $200mm by the SEC, $220mm (£137.6mm) by the Financial Conduct Authority of the UK (FCA), and $200mm by the Federal Reserve. Notably, while each of the aforementioned agencies released the company from the associated investigations, it does not exclude other government related agencies or the aforementioned regulators themselves from pursuing further actions related to the CIO trading incident, particularly if a pattern of wide-spread deficiencies in affiliated JPM entities is found.

At this point, our expectations include firm-wide legal accruals of approximately $3.2B-$3.7B for ’13, compared to $5B firm-wide accruals in ’12. Although we believe that JPM has been fairly conservative relative to its potential legal exposure in recent years, our current ’14 estimate of $6.30 implies on average roughly $375mm-$475mm (~$0.07-$0.09/shr atx) in quarterly legal expenses, or ~3% of the company’s operating expense base. While a meaningful settlement tied to the CIO has long been telegraphed, we continue to believe associated legal accruals will continue to trend lower into ’14/’15 as more meaningful legal true-ups are made in ’13 for the anticipated extended legal/regulatory pain tied for both the company and shareholders.

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